In the Matter of the Acquisition of Property by Eminent Domain. CITY OF OVERLAND PARK, KANSAS, A Municipal Corporation, Plaintiff, v. DALE F. JENKINS REVOCABLE TRUST, Appellant, and ALLEN A. NEWELL, Appellee.

SYLLABUS BY THE COURT

1. A lessee is an owner of the property and is entitled to just compensation if his or her
leasehold is damaged from the exercise of eminent domain.

2. It has long been the rule that where leased property is taken by eminent domain, it is
ordinarily valued as though held in a single ownership rather than by separately valuing
the interests of the lessor and lessee, and the compensation for the property taken or
damaged is apportioned by the district court between the lessor and lessee according to
their respective interests.

3. The overriding consideration in distributing the condemnation award between a lessor
and lessee is the equitable and just compensation for every sort of interest which the
citizen may possess in the thing taken.

4. Under the facts of this case, in distributing a condemnation award between the lessor and
lessee, it was equitable and proper for the district court to compensate the lessee for the
extra rent he was forced to pay due to the taking.

Frank H. Jenkins, Jr., of Lowe, Farmer, Bacon & Roe, of Olathe,
argued the cause and was on
the briefs for appellant.

James B. Jackson, of Kansas City, Missouri, argued the cause, and
Joseph R. Borich, III, of
Leawood, was with him on the brief for appellee.

The opinion of the court was delivered by

WAHL, J.: This appeal involves a dispute between a lessor and a lessee over
the proper apportionment of a condemnation award resulting from an eminent domain
action.

On November 30, 1995, the City of Overland Park filed a petition to condemn
several tracts of land for the purpose of acquiring rights-of-way and easements for the
construction and the improvement of the intersection of 151st Street and Metcalf
Avenue. One of the condemned tracts included real estate and improvements owned
by the appellant, Dale F. Jenkins Revocable Trust (Jenkins). Appellee Allen A. Newell
(Newell), a barber shop owner, was the lessee of part of this tract. Newell's barber
shop was a one-man, three-chair operation leasing 340 square feet in a commercial
building on the tract. In his answer to the condemnation petition, Newell stated he was
a tenant with a valid lease having a bonus value under Kansas condemnation laws,
which lease had to be acquired with fair market value being awarded to Newell plus
interest, moving, and relocation expenses.

As part of the construction project, it was necessary to demolish the
improvements on the tract, including the commercial building and a car repair shop. As
a result of the condemnation, each of the commercial leases was terminated and each
tenant was released from any obligation for further payment of rent as of the date of
taking.

In due course, the district court entered an order appointing appraisers and
setting a time for filing of the appraisers' report. On February 22, 1996, the appraisers
filed a report appraising the tract in question in the amount of $175,500. The district
judge entered an order approving the appraisers' report on the same day.

Pursuant to K.S.A. 26-517, Newell filed a motion requesting the district court to
apportion the appraisers' award of $175,500 among the lessor, Jenkins, and the
lessees. Newell was the only tenant asserting a claim for the market value of the
unexpired term of the lease. The district court conducted hearings pursuant to K.S.A.
26-517, which provides:

"In any action involving the condemnation of real property in which there is a dispute
among the
parties in interest as to the division of the amount of the appraisers' award or the amount of the
final
judgment, the district court shall, upon motion by any such party in interest, determine the final
distribution
of the amount of the appraisers' award or the amount of the final judgment."

The Eminent Domain Procedure Act, K.S.A. 26-501 et seq., provides for
bifurcated proceedings in determining compensation. Under the "undivided fee rule"
followed in Kansas, the total award for the condemned property is determined in the
first proceeding, without consideration of the competing demands of the various holders
of interests in the land. Thereafter, if various parties in interest cannot agree among
themselves as to the division of that award, the court allocates the award pursuant to
K.S.A. 26-517. See City of Manhattan v. Kent, 228 Kan. 513, 519, 618 P.2d 1180
(1980). As for the valuation of leasehold interests in eminent domain proceedings,
K.S.A. 26-517 does not provide guidelines for the division of the condemnation award
among the parties in interest.

In order to understand their positions, it is helpful to detail the contentions of
Newell and Jenkins. At the apportionment hearing, Newell testified that, as a result of
the condemnation, he had to move his barber shop 4.6 miles west of Stanley to Olathe.
Newell's original Stanley lease was for a term of 1 year from November 1, 1990, to
October 31, 1991, for $11.11 per square foot. The rent increased to $11.56 per square
foot in 1991, $12.22 in 1993, and $14.81 in 1996, and would increase to $15.99 in 1998
and $17.40 in 2000. His Stanley shop was a three-chair barber shop and measured
340 square feet. He shared parking, restrooms, and the hallway with other tenants.
His rent was $330 per month plus his share of the utilities. He stated the primary
attributes of the Stanley lease were its size, which perfectly suited his needs, its
location at a busy intersection, and the lengthy term of the lease.

Newell testified that as soon as he was informed that he would have to vacate
the commercial building, he began to search for another location in the Stanley area but
he could not find a lease with the same terms as the Stanley lease. He was unable to
obtain a lease in the new Stanley Price Chopper shopping center or at Stanley Station,
another shopping center, because both centers already had barber shops and no-compete clauses
prevented these shopping centers from leasing space to a second
barber shop. Newell stated he investigated the possibility of purchasing an older
house, but found it to be financially prohibitive. He also examined several other lease
possibilities in the Stanley area, but either the term was too short or the space was
larger than he needed. It was Newell's opinion that the Stanley lease was the exact
size he wanted, the price was "great," and the location was "terrific."

Newell was unable to find a lease for 350 square feet, which was all that he
required for his shop. Instead, he had to lease 1,100 square feet at the Olathe location
for a total of $11 per square foot. Newell stated that, despite the additional space, he
only had the same three barber chairs he had in his Stanley location. He stressed that
he had blocked off the unused space and had no intention of expanding his business.

Newell testified his Olathe location was the smallest and best location he could
find. His new location had better parking. He had one restroom of his own in the new
location, while he had two communal restrooms in the Stanley location. When asked
whether the new location was "far superior" to the old, Newell responded that the
building was newer, but the location was not as good because considerable traffic
passed by his shop every day in Stanley, while in Olathe, he was located in a
developing residential area with much lighter traffic. He agreed that the appearance of
the new building was superior and that access was a little better.

Clark Scroggin, a commercial real estate appraiser, testified for Newell. He
stated he examined other comparable properties in the area to ascertain a market level
of rent, examined the contract rent for the Stanley and Olathe leases, and made
comparisons between those and other comparable rentals in the market. He also
reviewed comparables used by Jenkins' expert real estate appraiser and found the new
Olathe lease to be in the same geographic area and generally similar in nature to the
marketplace in Stanley.

In analyzing the Stanley lease, Scroggin stated: "The most unique thing about
[the Stanley lease] was that it was approximately 300 sq. ft., which is virtually
impossible to find anywhere in the market and certainly not available in the subject
neighborhood." He also found it unique that Newell could rent a small space for such a
long term.

Scroggin performed a market data study of existing leaseholds, including the
Olathe leasehold, to determine a market level of rent, and he determined that the
Olathe leasehold was the most accurate for comparison purposes. Scroggin stated that
he performed an analysis to compare the contract rent of the Stanley lease to the
market rent, then abstracted the difference and abstracted it to a present worth based
upon an 8% discount rate.

Scroggin testified that the present worth of the Stanley lease was $24,201 and
the present worth of the Olathe lease was $64,823. He stated in his report that Newell
had a very favorable lease in place in Stanley which could not be matched in the
current marketplace.

Scroggin also testified that the other Stanley comparable leases he researched
were equivalent to Newell's Olathe lease. He concluded that the rent for the Olathe
shop was equivalent to market rent in Stanley. He also used the Olathe lease as a
comparable because the rent there was lower than the rent at Price Chopper and
Stanley Station. He stated he considered the Stanley lease far superior to Olathe in
location but inferior in construction and condition. Scroggin testified that the parking
ratio at the two locations was about the same. When asked if he had assigned any
percentage adjustment for these various factors, Scroggin stated:

"No. My conclusion was that the inferior aspects, the construction type, and the
condition of the
property would offset the superior nature of the location, and so I have used those figures as they
are. . . .
I made adjustments. The net adjustment was zero, so the unadjusted rent would be the same as
the
adjusted."

Bruce Baker, a real estate expert, also testified for Newell. He noted that the
most striking attribute of the Stanley lease was its location at the corner of 151st and
Metcalf, the length of the lease, and the rental rate.

Kevin Nunnink, a real estate appraiser, testified for Jenkins. He reviewed
comparable rental properties and stated that he compared the contract rent of Newell's
Stanley lease to the market rent and concluded that there was no benefit of the bargain
to Newell and that Newell's leasehold was of no value. Nunnink only used comparables
in Stanley for his appraisal. Nunnink's first comparable was 1,000 square feet at a
rental rate of $11 per month, and his second was 1,200 square feet at a rate of $10.72
per month. His third comparable lease was 3,878 square feet. Nunnink testified that
since the contract rate of Newell's lease over the entire term of the Stanley lease was
$14.17 and the range for market rent in Stanley was between $10 and $11 per square
foot, there was no benefit to Newell and no positive leasehold interest in the Stanley
lease. Nunnink did not include in his analysis the point that the $14.17 contract rate for
the Stanley lease was calculated over the long-term life of the lease to the year 2002
while his calculation of the contract rate for his other comparables focused only on the
rent in 1996. Nunnink also testified that Newell's new lease provided additional utility
due to its larger size. Nunnink did not address the facts that Newell was forced to lease
larger space than he ever intended to use and that he had blocked off the excess
space.

After hearing the testimony, the district court made extensive findings of fact and
concluded:

"16. At the apportionment hearing on the 26th of May, 1996, Clark Scroggin, Kansas
General
Real Estate Appraiser Certification #G-1049 and MAI Candidate, testified as an expert witness
on behalf
of Mr. Newell. After an exhaustive market study, Mr. Scroggin evaluated the market value of
Mr. Newell's
lease and found the lease's uniqueness which made it valuable in the market place due to its size
(300
square feet); location (151st Street and Metcalf Avenue northeast direct corner); term (until
October 31,
1991); and price (starting at $330.00 a month). Based upon these high qualities, the best
comparable is
Mr. Newell's new location on Blackbob. Taking those factors, as well as other factors in the
marketplace,
Mr. Scroggin's damages in the amount of $40,600.00 were arrived as follows under traditional
appraisal
techniques.

"17. The Court has carefully considered Mr. Nunnink's comparables for the Newell
operation.
The properties cited, however, were considerably larger than 300 square feet space leased by Mr.
Newell
and not otherwise properly suited for a barber shop operation. Accordingly, the Court finds that
the Newell
lease is unique and no comparable locations were reasonably available to Mr. Newell upon
condemnation
of the subject property."

The district court then ordered apportionment granting $40,600 to Newell and
$134,900 to the Trust.

On appeal, Jenkins argues that the district court failed to apply the proper
method of valuation in determining the value of Newell's leasehold interest and asks
this court to reverse the judgment of the district court and remand the case for a new
trial. The proper method of valuation is a question of law and subject to review on
appeal. Union Gas System, Inc. v. Carnahan, 245 Kan. 80, 91, 774 P.2d 962 (1989).
Our review of questions of law is unlimited. See Gillespie v. Seymour, 250 Kan.
123,
129, 823 P.2d 782 (1991).

Jenkins contends that the district court improperly used the substitute facilities
method of valuation. This method is defined as the amount needed to provide an
equivalent necessary replacement facility, undiminished by depreciation or functional
obsolescence. Although it is a recognized measure of compensation in condemnation
cases, the court has held it is applicable only to public condemnees such as churches
or schools because of the unique character and use being made of the public property.
See Whitewater River Watershed v. Butler Rural Electric Coop Ass'n Inc., 6 Kan.
App.
2d 8, 626 P.2d 228 (1981); Urban Renewal Agency of Wichita v. Gospel Mission
Church, 4 Kan. App. 2d 101, 603 P.2d 209 (1979), rev. denied 227 Kan. 928
(1980). In
City of Wichita v. Unified School District No. 259, 201 Kan. 110, 439 P.2d 162
(1968),
we held that school buildings and other special purpose properties are not ordinarily
traded on the market and, therefore, an approach other than market data must be
taken. We approved a judgment for the replacement cost of the buildings and noted
that in eminent domain proceedings against a public body, depreciation may not be
deducted. 201 Kan. at 112-16.

Jenkins' position is that since the district court awarded Newell an amount
essentially equal to the difference between the present value of the cost of the
unexpired term of the Stanley lease and the present value of the cost of the Olathe
lease for the same period of time, the district court used the substitute facilities method
of valuation. Jenkins maintains the proper method of valuation of a private leasehold
estate in condemnation cases is not the substitute facilities method but rather the
market value method by which the condemnee is awarded the market value of the
unexpired term of the lease over and above the rent stipulated to be paid. Jenkins
claims a close examination of the damage calculations resulting in $40,600 reveals that
the district court applied a measure of compensation based upon the cost of replacing
the Stanley lease with the Olathe lease.

Jenkins also takes issue with the district court's reliance on the fact that similar
leases were not available to Newell in Stanley. Jenkins further claims the Scroggin
appraisal made no adjustments for depreciation, age, quality, or size. Jenkins contends
that, even though the testimony was uncontroverted that Newell has blocked off the
additional space in Olathe, and has no plans or desire to expand his business, he has
the opportunity to utilize the additional space, which results in a potential and unjustified
windfall to Newell. Jenkins argues that Newell's "choice" to lease enhanced space
should not sway this court. Jenkins would have this court accept the conclusion of the
Nunnink appraisal.

The Fifth Amendment to the United States Constitution provides that it is
fundamental constitutional law that private property shall not be taken or damaged for
public use without just compensation. See K.S.A. 26-513(a). It is also the law of
Kansas that, if the entire tract of land or interest therein is taken, the measure of
compensation is the value of the property or interest at the time of the taking. K.S.A.
26-513(b).

"A tenant for years under a written lease is an 'owner' of property within the meaning of
that term
as used in our condemnation statutes and is entitled to compensation if his leasehold estate is
damaged
by the exercise of eminent domain."

In Phillips Petroleum Co. v. Bradley, 205 Kan. 242, 468 P.2d 95 (1970), we
held
that a condemnation award for property owned by several interests should be
apportioned among those separate interests, stating:

"It has long been the rule that where leased property is taken by eminent domain, it is
ordinarily
valued as though held in a single ownership rather than by separately valuing the interests of the
lessor
and lessee, and the compensation for the property taken or damaged is apportioned by the district
court
between the lessor and lessee according to their respective interests." 205 Kan. at 247.

29A C.J.S., Eminent Domain § 190, p. 457 states:

"The lessor is entitled to compensation for injuries to his reversion, and the lessee for
injuries to
his leasehold interests. The lessee is entitled to the market value of the unexpired term of the
lease less
the present value of the rent called for by the lease. Where the leasehold is relatively long and
rental
values have substantially increased since the inception of the lease term, the lessee's share may
exhaust
the entire award. The lessor gets the present value of the rents plus the value of the remainder of
the
estate or the value of the fee less the award to the lessee."

In Board of Sedgwick County Comm'rs v. Kiser Living Trust, 250 Kan. 84,
92,
825 P.2d 130 (1992), the court stated the standard methods used in valuation of real
estate in condemnation cases as

"'(a) the market data approach which is based upon what comparable properties had sold for;
(b) the
depreciated replacement cost or cost approach which is based upon what it would cost to acquire
the land
and to build equivalent improvements less depreciation; and (c) the income approach or
capitalization of
income which is based upon what the property is producing or is capable of producing in
income.'"
(Quoting Ellis v. City of Kansas City, 225 Kan. 168, Syl. ¶ 3, 589 P.2d 552
[1979].)

"the most common method of valuing real property and [that it] should be used when there
have been
sales of comparable properties in the same locale, near the time of the taking. When the property
is so
unique that there is no ascertainable market and there are no sales of reasonably similar or
comparable
property, the other methods--depreciated replacement cost approach or the income
approach--may be
used." 250 Kan. at 92.

The trial court has broad discretion in determining what other sales are
comparable. City of Shawnee v. Webb, 236 Kan. 504, Syl. ¶ 4, 694 P.2d 896
(1985).
With respect to condemnation of leasehold estates, we have held: "A lessee is an
owner of the property and is entitled to just compensation if his leasehold is damaged
from the exercise of eminent domain." Kent, 228 Kan. at 516. We have held that
damages due a lessee for the taking of an entire leasehold are equal to the fair market
value of the leasehold for the unexpired term of the lease. See Miles v. City of
Wichita,
175 Kan. 723, Syl. ¶ 3, 267 P.2d 943 (1954).

"In awarding compensation to a lessee for a leasehold appropriated for railway uses, the
market
value of the unexpired term should be allowed, taking into consideration as elements of value the
situation, condition and use made, or that may be made, of the premises, and the nature and
prosperity of
the business carried on there if it affects the value of the lease." 92 Kan. 771, Syl. ¶ 3.

The Bales court also held that the increased rental value of the premises
caused
by the addition by the tenant of decking, floor space, light plant, and fixtures was an
element that could be considered by the jury in determining the value of the unexpired
term. 92 Kan. 771, Syl. ¶ 1.

Here, the only issue before us on appeal is whether the district court used the
proper method of valuation in distributing the condemnation award between Jenkins
and Newell. We find that Jenkins' contention that the district court improperly used the
substitute facilities method is without merit. Rather, the district court adopted Scroggin's
valuation of Newell's leasehold estate and not that of Nunnink. Scroggin clearly
testified that he performed a market data study of existing leaseholds, including the
Olathe leasehold, to determine a market level of rent and that the Olathe leasehold was
the most accurate for comparison purposes. Scroggin then performed an analysis to
compare the contract rent of the Stanley lease to the market rent, abstracted the
difference and abstracted it to present worth based upon an 8% discount rate.
Scroggin clearly used the market data approach and not the substitute facilities
approach.

Jenkins' argument that Scroggin and the district court failed to make any
adjustment between the two leases to reflect the larger size of the Olathe lease and the
better condition of the Olathe building also fails. Scroggin testified that he had factored
in a percentage adjustment for these differences, and his conclusion was that the
superior aspects of construction and condition of the Olathe property were offset by the
superior nature of the Stanley location so that the net adjustment was zero. Although
the district court failed to make a specific finding regarding this adjustment, the court
obviously accepted Scroggin's evaluation.

Jenkins' argument that the district court's and Scroggin's use of the Olathe lease
as a comparable indicates that the district court relied on the substitute facilities method
of valuation is also without merit. Scroggin used the Olathe lease because the rent was
actually less than the rent of the Stanley leases used by Nunnink as comparables. In
addition, it made no actual difference which leases were used as comparables since all
the leases used were similar in size and rent.

We also reject Jenkins' next argument that the district court improperly relied
upon the lack of availability of the Nunnink comparable leases at the time of the taking
for a replacement location for the barber shop in deciding to exclude them as
comparables. Although the district court referred to the "availability" of the Nunnink
comparables to Newell, what the district court appears to have been emphasizing was
that there were no leases in the Stanley area which were equivalent to Newell's lease
irrespective of any time frame and that Newell's lease was unique. A trial court decision
which reaches the right result will be upheld, even though the court may have relied
upon the wrong reason or assigned erroneous reasons for its decision. Bank of Kansas
v. Davison, 253 Kan. 780, 792, 861 P.2d 806 (1993).

Research has failed to reveal a case in which the tenant was forced to lease
space larger than that occupied before the condemnation. However, the overriding
consideration in distributing the condemnation award between a lessor and a lessee is
the equitable and just compensation for "every sort of interest the citizen may possess"
in the property taken. U.S. v. General Motors Corp., 323 U.S. 373, 378, 89 L. Ed.
311,
65 S. Ct. 351 (1945). The approach favored by the district court which compensates
Newell for the extra rent he was forced to pay due to the taking is more equitable than
Jenkins' position which completely ignores Newell's loss in this regard.

It is apparent that the district court did not use the substitute facilities approach in
determining its distribution of the condemnation award, but that it applied the market
data approach.

The judgment of the district court is affirmed.

LOCKETT, J., not participating.

RICHARD W. WAHL, Senior Judge, assigned.1

1REPORTER'S NOTE: Judge Wahl was appointed to hear
case No. 78,259 vice Justice
Lockett pursuant to the authority vested in the Supreme Court by K.S.A. 20-2616.